Loan against property: is it for you?

A pertinent question in current times, are loans against property all they’re cracked up to be?

Banks today are offering a huge variety of loan products with and without security, collateral and guarantors. Among these options is a loan offering that’s as beneficial as it is potentially damaging – loans against property.

What is a loan against property?

It’s when you secure a loan by extending property that you own as collateral against default, to secure more funds at better rates of interest and better tenures. You’re putting your property on the line, so that in the event that something goes wrong with your loan repayment, etc. the bank has the legal right to take your property away from you and not suffer a loss.

The bank or lender will extend a loan amount that’s around 60% – 80% of the property’s market value, in order to protect itself from fluctuations in the real estate market.

What are the benefits?

By placing your owned property as collateral, you instil in the lender a sense of confidence in your ability to repay, and a sense of security that the lender won’t suffer a monetary loss in case you can’t repay your loan. As a result of this, the lender will offer:

-       Better rates of interest.

-       Longer tenures.

-       Higher loan amounts disbursed.

-       Useful for consolidating debt.

-       Flexibility to use funds for any purpose.

Is it for you?

Not answering this question has landed many borrowers on the street, with the lenders (legally) seizing their properties. People have made the mistake of pledging their properties against personal loans of tiny amounts, and large amounts alike – without a plan as to how the loan was to be used as capital or funding to secure more business or generate some kind of profits.

That’s right. A loan against property can only be justified if you’re using the large loan amount to fund an enterprise or venture of some sort that will generate a substantial revenue.

Why? Because a its just a really big personal loan, which has the added clause that you could lose your land if you don’t repay it

If you’ve got an incredible business idea, a huge investment opportunity, urgent requirement of a large cash infusion into your business, or need it to set up an industry of some sort, etc. – any of which will generate revenue at a rate higher than that of your EMIs and for a longer duration than your loan tenure. Either that, or it needs to have a huge pay out that will more than cover the loan you’ve taken.

Just ensure that you know have a fool-proof plan to pay your loan back, even if you’re taking it to buy a house.

If you don’t have a way to pay it back (or lose the ability to repay halfway through), make no mistake, the lender will seize your property as soon as you default or in some way fail to abide by the lender’s terms.

It’s fitting to point out now that “mortgage” is a term that was used to mean “death pledge”. Although not as morbid as it sounds, it refers to when the pledge ends (or dies) when the terms of the loan have been satisfactorily fulfilled or the property has been seized. It’s good to keep the term “death pledge” in mind while applying for such a loan so as to realise its power to take the land from beneath your feet.

Watch your step while applying for loan against property, but if you have the ability to repay it, nothing comes close to the benefits of a huge loan amount at a low rate of interest over a long tenure. It’s a good source of capital if you’re confident that you can make the best use of it.